What is an Opportunity Zone?
An Opportunity Zone is an economically‐distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. Locations, or Zones, qualify as Opportunity Zones if they have been nominated for that designation by the state and that nomination has been certified by the Secretary of the U.S. Treasury via his delegation of authority to the Internal Revenue Service.
Have Opportunity Zones been around a long time?
No – they were added to the tax code by the Tax and Jobs Act on December 22, 2017. The first set of Opportunity Zones, covering parts of 18 states, were designated on April 9, 2018. Opportunity Zones have now been designated covering parts of all 50 states, the District of Columbia and five U.S. territories.
What is the purpose of an Opportunity Zone?
Opportunity Zones are designed to spur economic development in economically‐distressed communities by providing tax benefits to investors. Those investments come in the form of real estate and local business development.
I am interested in knowing where the Opportunity Zones are located. Is there a list of Opportunity Zones available?
Yes – the list of designated Qualified Opportunity Zones can be found at Opportunity Zones Resources and in the Federal Register at IRB Notice 2018-48. Further a visual map of the census tracts designated as Qualified Opportunity Zones may also be found at Opportunity Zones Resources.
What are the Key Tax Benefits for Investors in Qualified Opportunity Funds?
To receive the most favorable tax treatment on their investment, investors are incentivized to hold their investments in an Opportunity Fund over the long term, with the program providing the most potential upside to those who hold their investment for 10 years or more.
The key tax benefits include:
- Investors can defer tax on any prior gains invested in a Qualified Opportunity Fund until the earlier of the date on which the investment in a QOF is sold or exchanged, or December 31, 2026.
- If the QOF investment is held for longer than 5 years, there is a 10% exclusion of the deferred gain. If held for more than 7 years, the 10% becomes 15%.
- If the investor holds the investment in the QOF for at least 10 years, the investor is eligible for an increase in basis of the QOF investment equal to its fair market value on the date that the QOF investment is sold or exchanged and generally will not recognize any gain on the disposition of that investment.
Is an Opportunity Zone the same as a 1031 Exchange?
No – there are a number of critical differences. A 1031 exchange is a provision that allows an owner of certain assets (most commonly used in real estate) to sell an asset and replace it with a like asset, and defer the tax payment on the capital gain until the property is sold and not replaced. One cannot sell stock, for example, and purchase real estate and defer the capital gains tax. A short table with the key differences can be found below.
|Benefit||Qualified Opportunity Zone||1031 Exchange|
|Tax Deferral||Until 2026||Until replacement asset sold|
|Gain Elimination||10% at year 5, 15% at year 7||None|
|Investment Gain Elimination||100% if held for 10 years||None. Only a deferral by acquiring replacement assets|
|Gains Eligible||Capital gains only||Real Asset gains/income only|
|Location Limitations||Designated Opportunity Zones only||None|
|Cash tracking||Not required||Required|
|Construction allowance||31 months||Parking transaction required|
|California State Tax conforming||No||Yes|
What types of taxable income are eligible for investment in a Qualified Opportunity Zone Fund?
Certain capital gains recognized prior to 2027 are eligible for deferral if they are invested in a timely manner in a QOF. There is no limit on the amount of capital gains that a taxpayer may defer by investing in a QOF. Eligible gains can include both short term capital gains and long term capital gains on the sale of assets such as real estate, stocks or a business. Certain limitations can apply. Please consult with your tax advisor on your personal tax considerations.
What Is the Required Timing for Deferring Gain through a QOF Investment?
Investors generally must invest in a QOF within 180 days of recognizing the eligible capital gain. If the investment is in a partnership (or LLC taxed as a partnership), the partner may treat the capital gain as recognized on the last day of the partnership’s taxable year in which the capital gain is recognized. The deadline for investing gains for calendar/taxable year 2018 (year ending 12/31/2018) is June 28, 2019.
How Can I Determine if I Have Eligible Gains to Invest in a Qualified Opportunity Fund?
Please consult your tax advisor to see if you have any eligible gains (net of tax loss carry forwards) available for investment in a Qualified Opportunity Fund. If you do, your tax advisor should opine on the types of securities, assets and gains that are eligible.
Does QOZ tax treatment apply to both Federal and State taxes?
Not necessarily. This is a Federal program, though as of January 30, 2019, 28 states have agreed to conform to the Federal 2017 Tax Cuts and Jobs Act. California is termed a non-conforming resident state because California taxes residents on 100% of their income, irrespective of where it is generated. Please consult your tax advisor to understand your state tax liabilities. Conforming states include: Alabama, Colorado, Connecticut, Delaware, District of Columbia, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Michigan, Missouri, Montana, Nebraska, New Mexico, New York, North Dakota, Oklahoma, Oregon, Rhode Island, South Carolina, Utah, Vermont, Virginia, West Virginia, and Wisconsin.
This communication is provided for discussion and illustrative purposes only and does not constitute an offer to sell or a solicitation of an offer to buy or sell any securities, including investments in the fund(s) mentioned in this document. Any offer will be made only by means of a formal confidential offering memorandum and only in those jurisdictions where permitted by law. Ashfield Capital Partners (“ACP”) makes no representation or warranty that all the information and assumptions that could or should have been considered have been considered. Past performance is not necessarily indicative of future results and there can be no assurance that targeted returns will be achieved or that the fund(s) will be able to implement its investment strategy or achieve its investment objectives. The information provided does not constitute legal, financial or tax advice.
Qualified Opportunity Zone (QOZ) investments are both complex and illiquid, and each investor’s tax circumstances are unique. Please be sure that you have read any offering materials carefully and discussed the investment with your tax advisor prior to investment. State tax treatment may vary from Federal law.